The column Schumpeter in The Economist is one that I read and like most for the insightful, razor sharp exposition of thinking and analysis. The latest one has the title ‘The Entrepreneurial State’. This article is based on a book, ‘The Entrepreneurial State: Debunking Public vs Private Sector Myths’ by Mariana Mazzucato of Sussex University. The book argues that the state (government) has played a central role in producing game changing breakthroughs and innovations.
The book demonstrates that unacknowledged state support has been the enabler of the consumer electronics revolution that has surrounded us. It lists a number of instances where state funding has been the source of many modern innovations such as Internet (which is rather known), HTML, and touchscreen (which have come from publicly funded universities) and even behind successful companies like Apple (which was funded by a government agency before it went public).
The most interesting part is that the most supportive of all nation states is found where one least expected, the United States. US government funds almost 60% of the basic research. Its armed forces pioneered the Internet, GPS and voice activated virtual assistants. They also provided much of the early funding for Silicon Valley. The research that produced Google’s search algorithm was funded by National Science Foundation.
Schumpeter argues that, at its best the state is the ultimate Schumpeterian innovator, unleashing the forces of creative destruction that provide strong tailwinds for private firms like Apple. To quote:
Economists have long recognised that the state has a role in promoting innovation. It can correct market failures by investing directly into public goods such as research, or by using the tax system to nudge businesses towards doing so.
The above observation seems strange to many policy formulators in developing countries. Post liberalization, the effort in most developing countries, the neo-converts to liberal state philosophy has been acting what the neo-converts always do – go overboard to show your new approaches. Following this state investment has been moving out of many areas. Public research institutions have been asked to justify their existence in the liberalized economy. The neo-converts forget that businesses are short-termists and will innovate only where return on investment is assured in the near future. I hope Indian policy makers do read what successful and innovative states have done.
Schumpeter argues that ‘putting all those different state funded technologies together into userfriendly iPads and iPhones required rare genius that deserve rare rewards’. True; but, for that there is the intellectual property system which ensures a limited monopoly in the market place. That should not obscure the importance of state funding which led to such technologies.
Pharmaceutical companies are bigger beneficiaries of state research than internet and electronic firms. Schumpeter says that behind most blockbuster drugs is the NIH support from its annual US$ 30 Mn fund. The following chart that Thomson Reuters had produced sometime back illustrates the point.
What is true for pharma is true in general is true for the rest of innovative enterprises. Most of the early stage innovations, which have long gestation periods and higher risks, are done in academic and not for profit research settings. It is in taking these innovations to the market that enterprises have their special skills. To be fair to pharma companies the development part is a long arduous and risky endeavor.
The lack of innovation in neglected diseases exemplifies this point. Pharma will show interest if there is foreseeable return on investment. There has to be a market pull. Take the case of Tuberculosis, which even now treats patients with frontline drugs developed in the 1950’s and 60’s; prompting Nature to write an Editorial titled Orphan Giant. Global market for TB is estimated to be only about $300 million. Therefore there is no market pull. If we redraw the world map according to TB incidence the world looks different as below:
So, there is no economic or other compulsion acting either on the industry or the governments located far away from the countries where diseases are prevalent. Compounding this is the complex scientific challenges, unclear route to the market and regulatory environment surrounding the neglected diseases. A study conducted by London School of Economics about a decade back had revealed that big pharma is wary of taking development risks in neglected diseases.
The Open Source Drug Discovery (OSDD) programme, led by the Council of Scientific and Industrial Research (CSIR), India, had understood this dilemma of the market. Therefore it advocates that public funding of research and development of drugs for neglected diseases. The countries that are affected by the neglected diseases have a responsibility to spur innovation by investing in research and development. India is showing an example on this through OSDD. OSDD has announced its intent to conduct clinical trials of an anti TB regimen by spending its own funds and at its own risk, in collaboration with TB Alliance.
Public funds need to support innovation. This is clear in the case of market failures. But what Ms. Mazzucato’s book reveals is that even behind successful market driven innovations, public funding has a major role to play. More than anyone else, the newly liberalized economies need to realize this. They just have to learn from the US.
